Front National – seems confused on its monetary proposals

Earlier this year, the French collectif Ecolinks, which is a group of economics academics and students in various French institutions published their Petit manuel économique anti-FN, which carried a preface from Thomas Piketty. The group says it is opposed to the current consensus in economics yet its blog seems to be full of Paul Krugman or Wren-Lewis quotes or links to their articles (or other New Keynesians – who are the ‘consensus’, unfortunately). They are obviously worried about the political popularity of FN (Marine Le Pen’s National Front) and have thus produced their anti-FN book as a critique of FNs economic approach. They claim that FN proposes policies that represent “le repli sur une identité étriquée et une vision fantasmée de la nation, rendent cette perspective catastrophique” or in translation, “a retreat into a narrow identity with a fantasised vision of the nation, which would be catastrophic”. The book has received some coverage since its release by a French press that is increasingly worried about Le Pen’s popularity. Please do not interpret in what follows any hint of support for FN from this blog other than as a ‘cat among the pigeons’ force in European politics, anything that upsets the right-wing, neo-liberal, corporatist elites that run the show is to be welcome. I also support Marine Le Pen’s observation that the “The EU world is ultra-liberalism, savage globalisation, artificially created across nations”. That is why I hoped the Leave vote in Britain would win. It is a pity that she marries these views with other hostile views towards immigrants etc, although I am not an expert on immigration so I do not write much about it. It is also a pity that the so-called progressive Left in France (or elsewhere) has left it to the likes of Le Pen to articulate what I would consider to be progressive economic policies. Although, that assessment has to be tempered by the observation that Le Pen’s approach to economic policy is somewhat confused – in part, by her ‘political’ assessment that France is not yet ready to leave to Eurozone. At that point, some bizarre contradictions emerge and the anti-FN book correctly points them out.

FN’s policy proposals are outlined in its – 144 Engagements Présidentiels (144-point manifesto).

The opening statements talk about regaining France’s freedom and mastery over their own destiny (“Retrouver notre liberté et la maîtrise de notre destin en restituant au peuple français” and defines sovereignty in terms of “monétaire, législative, territoriale, économique”, which would suggest a return to its own currency.

Critics seem to characterise those who advocate a return to national currency sovereignty as ‘small vision’ as opposed to the European Union which is claimed to be ‘big’. It is big on corporatism and anti-democratic bullying and certainly big on the unemployment it has created.

My view is that a return to national currency sovereignty, that is exiting the Eurozone and floating one’s currency is a grand vision for full employment and reduced inequality.

Of course, the neo-liberals can take control of a nation that is sovereign in its own currency (as in Australia or the UK at present) and use the capacity that currency independence brings to bad effect.

But a truly progressive government cannot really exist in the Eurozone or in a nation that pegs its currency or accepts legal dictates from an undemocratic bloc (such as the EU).

The Manifesto is big on law and order and border protection – which I leave to one side.

It moves on to talk about “Une France prospèreun nouveau modèle patriote en faveur de l’emplo” (which is a new patriotic model for employment) and seems to include strategies for re-industrialisation, industry support for French companies facing unfair international competition (aka protection, although apparently it will be “protectionnisme intelligent”) and the restoration of a national currency adapted to our economy to act as a lever for competitiveness (“le rétablissement d’une monnaie nationale adaptée à notre économie, levier de notre compétitivité”).

FN also (sensibly) wants to free itself from European constraints regarding public procurement policies, which under EU rules are outlawed under the state assistance laws.

Any state should have the capacity to use its spending power to buy what it wants and to use its spending to advance national interests.

It makes no sense for a nation to endure persistent and elevated levels of labour underutilisation (unemployment and underemployment) and for the state to be purchasing goods and services from abroad, if they can be produced locally.

They want to create structures to prevent predatory financial market speculation damaging the local real economy – we should support that.

They want a state body to manage economic change due to new technologies to ensure that all French workers benefit.

They want to stop French companies that receive public assistance in building productive capital from being bought up by foreign private equity companies (then asset stripped etc) – we should support that.

They want to expand the publicly-funded research funding in France by 30 per cent – we should support that.

And then we get to the interesting parts (from my perspective).

We read Item 43 (in part):

Sortir de la dépendance aux marchés nanciers en autorisant à nouveau le nancement direct du Trésor par la Banque de France.

Which aims to eliminate the dependence on the financial markets by authorising the direct financing of the Treasury by the Bank of France. That is Overt Monetary Financing (OMF).

I will come back to that because it is the essence of today’s blog.

Item 43 also talked about eliminating wasteful public spending in areas such as immigration and the EU.

There follows a host of fiscal stimulus measures (tax cuts, public spending etc) “privilégiant l’économie réelle” (privileging the real economy over the financial sector) and “garantir la protection sociale” (guaranteeing social protection), the latter embracing various pension improvements etc, none of which I find problematic.

There are so many proposals designed to reduce the power of the profit-seeking private markets in area such as health care, energy provision, consumer protection, educational access, support for those with disabilities (including access to employment), and more, all of which are sound policies that a progressive agenda should support.

This intent to regulate markets to ensure they deliver outcomes that benefit the wider population and not just the narrow class of capital owners extends to a rejection of the so-called ‘free trade’ agreements and the investor-state dispute mechanisms, in particular, that are embedded in these neo-liberal documents. Such mechanisms essentially prioritise international capital over elected legislatures.

No progressive political party should agree to these agreements.

Let us return to the macroeconomic currency issues that FN have raised.

FN’s plan will clearly involve fiscal stimulus to restore growth to France and increase jobs. That should be supported and would probably break the Growth and Stability Pact (and related Fiscal Compact) rules, which means that France will leave the Eurozone.

That is certainly implied by the plan to restore the independence of the Banque de France, in terms of it exiting the European System of Central Banks, which is effectively the ECB and the Member State central banks.

France could not remain in the Eurozone with a separate central bank setting its own interest rate.

But more importantly, FN proposes to use the newly-restored currency issuing powers of the Banque of France to facilitate Treasury fiscal policy – that is, credit bank accounts on behalf of the elected government, thereby reducing (or eliminating, depending on the scale) the dependence of government deficit spending on private financial markets.

I have written about OMF before in several blogs, including the following:

1. OMF – paranoia for many but a solution for all.

2. Monetary policy has to work hand-in-glove with fiscal policy to be effective.

3. Overt Monetary Financing would flush out the ideological disdain for fiscal policy.

4. The Bank of Japan needs to introduce Overt Monetary Financing next.

5. Overt Monetary Financing – again.

6. There is no need to issue public debt.

This is the preferred Modern Monetary Theory (MMT) arrangement linking the central bank and the treasury, as a consolidated government sector.

From an MMT perspective, OMF is a desirable option that allows the currency issuer to maximise its impact on the economy in the most effective manner possible.

Neo-liberals hate the idea. They magnify a sense of fright among the population, by demonising what are otherwise sensible and viable explanations of economic matters.

They know that by elevating these ideas into the domain of fear and taboo, they increase the probability that political acceptance of the ideas will not be forthcoming.

That strategy advances their ideological agenda. They have vested interests in ensuring that the public does not understand the true options available to a government that issues its own currency manipulate that suspicion.

In the place of these simple truths, neo-liberals advance a sequence of myths and metaphors that they know will resonate with the public and become the ‘reality’.

OMF is one such ‘taboo’ and such fear is totally unjustified.

The idea of OMF is very simple and does not actually involve any printing presses at all. While the exact institutional detail can vary from nation to nation, governments typically spend by drawing on a bank account they have with the central bank.

An instruction is sent to the central bank from the treasury to transfer some funds out of this account into an account in the private sector, which is held by the recipient of the spending.

A similar operation might occur when a government cheque is posted to a private citizen who then deposits the cheque with their bank. That bank seeks the funds from the central bank, which writes down the government’s account, and the private bank writes up the private citizen’s account.

All these transactions are done electronically through computer systems. So government spending can really be simplified down to typing in numbers to various accounts in the banking system.

When economists talk of ‘printing money’ they are referring to the process whereby the central bank adds some numbers to the treasury’s bank account to match its spending plans and in return is given treasury bonds to an equivalent value. That is where the term ‘debt monetisation’ comes from.

Instead of selling debt to the private sector, the treasury simply sells it to the central bank, which then creates new funds in return.

This accounting smokescreen is, of course, unnecessary. The central bank doesn’t need the offsetting asset (government debt) given that it creates the currency ‘out of thin air’. So the swapping of public debt for account credits is just an accounting convention.

Nothing could be more simple. The government funding its own spending with its unique currency issuing capacity and regulated politically by the electoral process.

The point to note is that the inflation risk lies in the spending not the monetary operations (debt-issuance etc) that might or might not accompany the spending.

All spending (private or public) is inflationary if it drives nominal aggregate demand faster than the real capacity of the economy to absorb it.

Increased government spending is not inflationary if there are idle real resources that can be brought back into productive use (for example, unemployment) or grows in proportion to the growth in productive capacity in the economy.

Related propositions include the claims that OMF would devalue the currency whereas issuing bonds to the private sector reduces the inflation risk of deficits. Neither claim is true.

First, there is no difference in the inflation risk attached to a particular level of net public spending when the government matches its deficit with bond issuance relative to a situation where it issues no debt, that is, invests directly.

Bond purchases reflect portfolio decisions regarding how private wealth is held. If the funds that we used for bond purchases were spent on goods and services as an alternative, then the budget deficit would be lower as a result.

Second, the provision of credit by the central bank (in return for treasury bonds) will only be inflationary if there is no fiscal space.

Fiscal space is not defined in terms of some given financial ratios (such as a public debt ratio).

Rather, it refers to the extent of the available real resources that the government is able to utilise in pursuit of its socio-economic program.

So in this regard, FN is the only political party in France and nearly the world that is prepared to break through the neo-liberal taboo and advocated OMF, which is facilitated by currency sovereignty.

It would clearly violate the Treaty of Lisbon rules regarding direct central bank funding of deficits, and, as such, puts Le Pen’s claim’s that she wants France to remain in the European Union into question.

But then things get mirkier when we explore the question of currency. Things are not so clear and suggest the pieces of the ‘sovereignty’ puzzle have not really been well thought through.

In effect, in trying to walk the political tightrope, FN have compromised their basic ambition, outlined in Item 1 of the 144-point Manifesto that they want to:

Retrouver notre liberté et la maîtrise de notre destin en restituant au peuple français sa souveraineté (monétaire, législative, territoriale, économique).

That can only happen, if as article in Le Tribune (February 8, 2017) – Financement du déficit: mais où va Marine Le Pen? – notes:

Reste alors une seule solution pour garantir une réelle souveraineté monétaire et budgétaire : la sortie pure et simple de l’euro.

That is, the only guaranteed solution to real fiscal and monetary sovereignty, is an outright exit of the euro.

Le Tribune went on to say that FN is now avoiding an outright exit because it doesn’t want to deal with the debate during the election campaign.

So it is a hollow claim that FN will restore sovereignty as a matter of course.

In various interviews that Marine Le Pen has given in recent months she has introduced a new plan to try to straddle both camps – exit and remain.

These concoctions reduce her economic credibility, a point that the Petit manuel économique anti-FN makes well.

The compromise was proposed in this 23 minute interview – L’invitée de Bourdin Direct: Marine Le Pen – on January 3, 2017, a month or so before she formally launched her Presidential campaign.

Far from exiting the Eurozone, Le Pen proposed the reintroduction of the national currency (franc) but also to retain the euro as a common currency.

She said:

I want a national currency with the euro as a common currency. What was the Ecu [European Currency Unit]?

The Ecu?

What is that? Well, it is not a currency and never was. The Ecu was the European Currency Unit, introduce as part of the European Monetary System (EMS), which replaced the failed ‘snake’ (fixed exchange rate system) in 1978.

Recall that after the breakdown of the Bretton Woods system (in August 1971), various attempts were made to restore it (for example, the Smithsonian Agreement).

The Europeans introduce the ‘le serpent l’intérieur du tunnel’ as an outcome of the Basel Accord in 1972. The Member State currencies could snake along in value a rather tightly constricted tunnel (fluctuation bands).

That system took effect on April 24, 1972.

It didn’t take long for the snake to escape its tunnel, such was the impossibility of tying all these Member State currencies together in a formal arrangement.

So once the snake started slithering out of control a few months after the Basel Accord the central banks were put under tremendous pressure to stabilise the currencies within the agreed parities.

Britain couldn’t and left. Italy left. Switzerland left.

The remaining Basel Accord partners (Benelux, Denmark, France, Germany and the Netherlands), however, chose to ignore the ‘sword of Damocles’, such was their fear of floating exchange rates, and on March 12, 1973, announced they would jointly float against the US dollar, effectively keeping the ‘snake’ (Basel Accord) but abandoning the ‘tunnel’ (the Smithsonian Agreement).

The problems deepened and it was only the use of capital controls that allowed central banks to maintain any sense of stability.

By 1977, it was clear the ‘snake’ was falling apart after France had withdrawn in 1976 and Germany’s trade strength put pressure on all other currencies.

There were legal disputes as Italy, Denmark and the United Kingdom chose to defy EEC rules regarding free trade (under the customs union) and impose import restrictions, in an effort to stem their persistent balance of payments deficits.

By 1978, the snake was done and Helmut Schmidt and Valéry Giscard d’Estaing met in relative secrecy in early 1978 to develop a joint strategy to replace the ineffectual ‘snake’ with a more integrated level of monetary cooperation. T

After working out a deal that both nations could live with, the two leaders unveiled their plan for a renewed attempt to introduce a European Monetary System (EMS) at the European Council summit in Copenhagen on April 7 and 8. The proposal became reality at the European Council meeting in Bremen on July 6-7, 1979, when the leaders decided to push ahead with the creation of the EMS along the lines laid out in Copenhagen.

The EMS introduced the European currency unit (ECU), which was effectively identical to the previously created European Unit of Account (EUA).

The ECU was intended to be the benchmark accounting value against gold, which other currencies would be paired against.

It was also to be used by the EEC central banks as a means of settlement.

The ECU was to reflect a basket of European currencies with each participating central bank subscribing 20 per cent of their US dollar and gold reserves to the initial pooled ECU fund.

Initially, this allocation of ECUs to the Member States was to be administered through the EMCF, established in 1972 as part of the ‘snake’. The proposal also extended the European credit facilities available to central banks to make it easier to maintain the agreed parity ranges. For example, the Very Short-Term Financing (VSTF) facility was designed to automatically extend credit to any nation that required funds to defend its currency.

On the question of symmetry, the so-called ‘bi-lateral parity grid’ was created with the individual currency values expressed in terms of the Ecu. This meant that the individual currency parities against the Ecu also defined their values against each other.

The French, particularly, wanted the ECU to be a central part of the system and to be used as the intervention unit because they assessed it would reduce the importance of the German mark.

Germany opposed the use of ECU as the basis for intervention for various reasons, which need not concern us here. Essentially, it wanted a system that would free the Bundesbank from having to bear all the responsibility of maintaining parities in the face of on-going upward pressure on the mark.

In this context, there were on-going disputes about the creation of a central fund (that is, a central bank) that could use the Ecu to intervene to maintain parities.

That is the historical background necessary to get the next point.

The ECU was a linking unit within a fixed exchange rate system. That system (EMS) failed badly and instead of realising that the Member States could not reasonably maintain the agreed parties, without seriously compromising their sovereignty (and capacity to maintain full employment), the Member States went one step further into madness – and signed the Maastricht Treaty.

So the exchange rate variability was eliminated by the common currency but the economic pressures that had created the exchange rate variability remained – and now show up as massively diverging unemployment rates and growth rates.

Now governments impose austerity to stop their fiscal balances breaching the SGP rather than facing pressures to devalue their currencies against the mark.

Not much has changed. European governments started compromising their sovereignty when they signed up for the Common Agricultural Policy (CAP) and fixed exchange rates.

FN is thus suggesting some half-way house, which will clearly be dysfunctional.

If FN is proposing to reintroduce the franc (and all other national currencies). They want to make the franc the currency that the French government spends and taxes in.

But they then want to link these currencies with each other through the ECU (or effectively the euro). In trying to salvage some relationship with the euro via the ECU, FN is suggesting maintaining fixed parities with the euro.

That won’t work.

Another reading of the FN compromise is that they want to use the franc within France but allow French companies to use euros for their cross border transactions.

So this is also not the situation under the EMS and the ECU, where francs were the sovereign currency and foreign currencies were purchased in foreign exchange markets.

So any attempt to use the franc locally and the euro globally would raise questions about the exchange rate. Then France is back to the bad old days of trying to prevent the franc from crashing (against the mark – or in this case the euro) and having to raise interest rates above the levels of its trading partners (to attract capital denominated in francs) and cut national income growth (to curb imports).

That system didn’t deliver prosperity and it is hard to match the stimulus plans they propose (OMF or not) with the currency arrangements they hint at.


To repeat, the only one solution to guarantee real monetary and budgetary sovereignty involves an exit from the euro and the free float of the new currency on foreign exchange markets.

Then the government can use its newly acquired currency-issuing capacities to target full empoyment and forget about the austerity bias that is the inherent in the Euroepan Union.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.

This Post Has 28 Comments

  1. “So any attempt to use the franc locally and the euro globally would raise questions about the exchange rate.”

    It raises a lot of interesting questions that we need to address in MMT. What you would have in this situation is a country that is ‘dollarised’ (in this case with the ‘foreign’ Euro) into which a state is trying to introduce its own currency.

    I’ve been thinking through the same scenario in relation to Scotland (which is ‘dollarised’ with the British pound). Could local currencies be introduced at city level to give the city the ability to introduce a city wide Job Guarantee?What would it mean to float the Bristol Pound for example?

    Local currencies could be introduced with ZIRP, tight, usually land based, taxation and asset lending restrictions on the banks and credit unions that deal with the currency. Margin trading restricted on the exchange (less capital controls and more sensible market management) so that we work out how free those can be to get the trade benefits without the capital flow pollution. And discover the root cause of volatility.

    Could that be made to work? If it can then it provides the escape route for countries like Greece and France, it provides assistance to anywhere that is fighting against dollarisation (developing nations) and a way for regions of a country with different political views to drive their own path.

    If we get it to work from the bottom up, and currency is the expression of legal power then nation’s borders will reshape to fit the political realities of the 21st century rather than the 19th.

    Certainly it is a fascinating area that is ripe for research.

  2. In Italy, the Movimento 5 stelle (which I don’t like much, in particular il padrino Grillo) seems to support the ideas developed in the book ‘Per una moneta fiscale gratuita’, i.e. a ‘fiscal currency’ which would supplement the Euro. I haven’t read the book yet though.

  3. Dear Bill

    I have just read les 144 Engagements Présidentiels. I can’t find anything sinister in it. A lot of it makes sense. I can’t judge all of it because that presupposes detailed knowledge of France that I don’t have. Some proposals are dubious, such as fixing the retirement age at 60, creating 40,000 new places in French prisons, raising defense expenditure to 3% of GDP. She wants to introduce proportional representation for the National Assembly (the French equivalent of the House of Commons), but then have a bonus of 30% of the seats for the party that receives the largest number of votes. Hmm, that doesn’t sound very proportional to me. It is #3 of her engagements.

    Regards. James

  4. Fascinating blog post. I wish my French was as good as Bill’s.

    “FN is now avoiding an outright exit because it doesn’t want to deal with the debate during the election campaign.”

    Same for the Scottish National Party which dodges the issue of the pound (to which Neil alludes). They have undertaken market research and “focus groups” to find that the majority of the Scottish people want to retain the pound should they gain independence even though they don’t in any way understand what that entails (with the greatest respect to the Scottish people who for sure don’t have time to read Billyblog). Same presumably goes for the FN. Europeans seem to like the Euro because of the ease of crossing borders without understand the fiscal ramifications. In order to have a chance of electoral success they have to appear to be acceding to public opinion.

    That said, I did see a poll shortly after the Greek referendum that showed that there was actually a small majority in favour of returning to the drachma, contrary to the political rhetoric that suggested the opposite.

  5. The FN economic proposals should not be viewed separatedly of their political proposals (La Battaglia di Algeri!)

  6. I hope there will be some comment on Macron’s policies before the election. Seems to me France is screwed one way or the other, it will either be huge public sector cuts under Macron, or else the problems outlined above combined with increasing sectarian violence and unrest under Le Pen.

  7. Re Neil Wilson and local currencies:
    In the early 1980’s a city in England (don’t remember which) experimented with a local currency. It was very limited, essentially a means of barter coupled with a way of overcoming the difficulty of actually getting things you want. E.G. I do someone’s income tax return in exchange for a haircut and a shave but what I actually want is a massage. I would receive currency units for my work and be able to exchange them for the massage. I don’t know what ultimately happened to the experiment.

    While the idea has some appeal I do see difficulties. From a Chartalist perspective the local currency should be convertible into tax credits to give it value. The city I live in levies $4500 from me yearly in property taxes so that amount would establish the limit of how much I’d be prepared to save annually in local currency. But how much would the city want of its own local currency versus Canadian dollars? It does after all require goods and services from outside the city. If I could get services I wanted in exchange for services provided by me, mediated by the local currency, I guess I’d go for it, but what happens if I want to exchange my “city dollars“ for a meal, new window, etc, sourced from outside my locality? There would need to be an exchange rate. Seems pretty complicated.

    Warren Mosler proposed a way for US states (and Greece) to introduce a state-wide currency by issuing tax credits redeemable for state taxes. It seemed pretty convincing to me at the time but I don’t remember the details.

  8. For a currency issuing government to employ resources for public purpose, and of course pay them, without the debt restrictions of a currency user, makes perfect sense, but then I’ve been reading this blog for a while.

    James writes: ‘Some proposals are dubious, such as fixing the retirement age at 60’. As far as I can see, a retirement pension starting at an age when many people start to be excluded from the labour market and when there are young people underemployed, is the only sort of Basic Income that should be considered above a Job Guarantee Scheme.

    Whenever inflation is talked about it always excludes house prices. The increase in these should be what is feared and what governments direct attention to since it’s taking a large share of people’s income and has excluded a younger generation from economic security. Frankly we should probably be paying a greater share of income for food and clothing (notwithstanding the ridiculous minimum 15% VAT mark-up forced by the EU and added to by the UK government) produced on the back of low paid and insecure people, and a lot less for shelter.

  9. Re le Front national (FN):
    Thanks for the analysis Bill. I briefly read the FN economic policies posted on their website a few years ago and was surprised at how sensible they seemed. Your post will get me to read the 2017 version.
    The President of le Medef, the French national business association, claimed the economic policies of the FN were of the far left in late 2015. See Predictably his view was that worker protections should be abolished in order to create jobs. That was partially done by the “socialist“ President in 2016 despite 75% of the population being against the changes. No doubt he will receive a fee for services rendered in due course.
    As you say, it is unfortunate that ostensibly left political parties no longer propose left economic policies. That happened to us in Canada where the supposed centre-left party, the NDP, ran to the right of the neo-liberal pro big bank Liberal party in October 2015. (Note that Canadian banks are mostly very conservative, and heavily regulated, and did not engage in the crazy risky lending most of the banks in the western countries did).

  10. Keith Newman

    I think I am correct in saying that the first city (actually a town) to do this was Totnes, but several towns and cities now do it, including Bristol – the Totnes one is still going strong. The exchange rate is simple because the Totnes pound is equal to a pound sterling – i.e. it is dollarized. If you need to use it to pay national or any other tax you just exchange your T£s for £S and deposit it to the bank. Otherwise, local currencies can only be used for exchange of goods and services within that town and immediate vicinity amongst participating traders, In the UK you can only pay national taxes by electronic transfer. I don’t know if you can pay local taxes with local currency. I think I did see somewhere that some of the schemes allow you to pay Council Tax with it; it wouldn’t be difficult for the Local Authority Finance Department to do that. Local Business rates at present are paid to central government, but that is about to change as Local Authorities will be able to keep them in exchange for less funding from central government. Something sensible for a change.

  11. ‘Local Authorities will be able to keep them in exchange for less funding from central government. Something sensible for a change.’

    Not so sure Nigel. There will be a great disparity of business rates income in run-down areas and areas where there is the familiar sight of empty shop fronts.

    Some have seen this as a divisive way of Government shifting the blame off itself to local councils and the usual neo-lib cry of ‘ it’s all those people on benefits causing the problem, if they just all became businessmen we’d have the money.’

  12. stark contrast to yesterdays blog.
    Yesterday we had the logical fail of guilt by association BIG is bad because some CEOs support it.
    In that context this blog could be titled why do fascists support OMF.
    In todays blog we have no inflationary bias associated with the source of spending eg OMF
    in the BIG context welfare spending has an inflationary bias regardless of the markets the money is spent

  13. “I am not an expert on immigration so I do not write much about it”.
    Neither am i but,in the spirit that imports are positive resources costing Only money, are immigrants positive resources? I think Germany stole a arch on everyone by taking in a million immigrants last year.. isn’t this a tremendously valuable gain for the country ( whose labor force is aging)? Also many of these people are the most educated and entrepreneurial?
    Just asking. Seems Ike a plus for Germany.

  14. “Increased government spending is not inflationary if there are idle real resources that can be brought back into productive use (for example, unemployment) or grows in proportion to the growth in productive capacity in the economy.”

    I have trouble in accepting this inflation theory – although it seems much superior to the orthodox theory that relies on rational expectations and other sorts of fairy tales.

    I mean, suppose you live in a monetary sovereign country with high unemployment rates (like 20% or more). So there are a lot of idle real resources.

    I am pretty sure that, if the government enacts a law that doubles the public wages each year, you will have an annual inflation rate of 100%. That kind of raise in the public spending would be inflationary even in an idle economy.

    If that thinking is reasonable, then it would be incorrect to generalize and say that “increased government spending is not inflationary if there are idle real resources”.

    Of course there are other kinds of increasing in the public spending that are not inflationary, like the Job Guarantee. But that doesn’t seem the general rule to all kinds of increases in public spending…

  15. Local currencies…they do seem to arise in recessions, and presumably because they are a partial solution to recessions. The Austrian town Worgl had a very successful local currency in the 1930s. It was too successful: the Austrian government closed it down.

    The other “grass roots” solution to recessions is barter: increasingly common in Greece – not surprising.

  16. Andre, you’re making a couple of assumptions with that scenario, if any of the following are not true then the increased wage will not be the sole cause of inflation;
    A) Absolutely everyone is receiving the doubled income
    B) Absolutely everyone spends twice as much as before, with no proportional increase in saving
    C) There’s no corresponding rise in supply from the additional spending increasing the employment rate
    D) The country doesn’t import or export anything

    And that’s just giving it a couple of minutes thought.

  17. Matt B,
    It seems to me that we don’t need to make these assumptions for my scenario to be valid, but let’s not bother with that for a moment.

    Let’s suppose that we really need to make a lot of assumptions for my scenario to be valid. Even with that in mind, we can’t say generally that “Increased government spending is not inflationary if there are idle real resources that can be brought back into productive use”. That’s not a general theory, that’s a limited theory that works sometimes but doesn’t work all the times.

    So, what’s the general theory that explains all kinds of inflation or deflation periods? I still haven’t found it… I just find some restricted theories that work in restricted scenarios…

  18. “So, what’s the general theory that explains all kinds of inflation or deflation periods? ”

    Fairly obvious. Paying more than necessary for stuff. Price is a way of stopping two things happen at the same time.

    If you think in terms of government buying, rather than spending you’ll get a lot further.

    Government is, or should be, about getting maximum amount of stuff for minimum amount of money – subject to the social minimum of the job guarantee. The minimum of the job guarantee is that you buy 8 hours of labour power from an individual for 8 x the living wage per hour.

    So if there are resources idle in the country then the government can pick them up for a song because there are no other bids. If there are other bids then the government needs to look at the value it is obtaining and ask whether it can wait (i.e. put its bid on the shelf until there are no other bids) or whether it has to knock out the other bids (which is what taxation, restriction on planning, or restriction on bank lending do).

    What it should almost never do is pay the ‘market price’. The government is the price setter, not a taker. The supplier can either take it, or leave it. If it leaves it then you have created a massive drop in demand which will come back on the supplier via the natural competitive circulation forcing the price down to what the government is prepared to pay.

  19. Simon Cohen

    This isn’t really the forum to discuss it. I agree with what you say but that is more to do with the way the business rates are set than the actual principal. I’m just pointing out it would be perfectly possible for councils to accept local currency – even desirable, and they might even issue it – the matter of business rates was an aside. I would just add that shops closing down is more to do with online shopping than business rates. Yesterday I went to a shop to buy a certain item as I do endeavour to support local shops if I can but they did not have it and had never heard of it. I ordered it online and it will be delivered today. Sometimes you can even get same-day delivery.

  20. Neil Wilson,

    I agree with your view, that seems to be more or less Warren Mosler’s too. But it’s not obvious at all.

    But if what you are saying is true (and I believe it is, but I have never seem academic work trying to prove or disorive it) then necessarily the following assertion is not always true: “Increased government spending is not inflationary if there are idle real resources that can be brought back into productive use”.

    Actually, following your theory, it would be true only when the government act very cautiously when spending and bid the “correct” prices, which usually is not what happens in the real world…

  21. It does appear that the FN are mostly on the correct path economically and that all formerly progressive parties have abandoned progressive policies and remain firmly neoliberal, presumably to try to attract the vote of the rather conservative swinging voter in the swinging seats that have a disproportionate influence on who wins elections, or is it for personal greed or cowardice? Here’s hoping France abandons the Euro and adopts a free floating Franc and overt monetary financing.

    The worldwide rise of right wing parties or individual politicians like Trump that appeal to sections of the working and middle class should presumably apply some pressure to progressive parties to once again offer policies that appeal to their core constituencies after 30+ years of neoliberalism.

    Hitler and Mussolini were also relatively good managers of their national economies up to when their other mad policies brought everything crashing down. I doubt the FN will become military expansionists or murder their own citizens. What are the FN’s policies on global warming, protecting the environment, social welfare and foreign aid? As bad as Trump?

  22. André — I think that , in a way, you are right, but that yours is too extreme a formulation. There is surely substantial latitude for the government to spend above “correct” price-points without triggering any significant increase in inflation. As Neil says, it generally makes sense for the Government to get the “maximum amount of stuff for the minimum amount of money”. My question is: what is “stuff”?

  23. then necessarily the following assertion is not always true: “Increased government spending is not inflationary if there are idle real resources that can be brought back into productive use”.

    Andre, I think it’s implied in Bill Mitchell’s statement that the increased net government spending needs to be targeted appropriately, i.e. spent in ways that actually bring idle resources into productive use. Simply doubling the wages of current public sector workers would be a measure that isn’t targeted at creating paid work for the unemployed and under-employed, so it isn’t the kind of spending increase that Bill Mitchell is recommending.

  24. “I think it’s implied in Bill Mitchell’s statement that the increased net government spending needs to be targeted appropriately”

    I never thought that, but indeed that may be the case.

    I am sure that Bill says that increasings in government spending through a JG programmale would not be inflationary because the financial resources would be directed to employ idle resources (unemployed people), while JG wages would be constant at the minimum wage socially accepted as the necessary for subsistence.

    But when Bill says “increased government spending is not inflationary if there are idle real resources” I thought that he was saying that it’s always true in general. For me it was something like: while there is unemployment, the government can and should spend more, and that will not cause inflation, no matter what kind of spending we are talking about – there may be distributional issues, but inflation would not be an issue. That’s how I always read it. I may be wrong, I don’t know…

  25. Apart from the apparent compromise presented in the blog,I have always (privately) supported (marine) le pen.I agree with her economics (and geopolitics too) as unfashionable it is too say.

    andre-My thinking on Inflation is about keeping the supply side of the economy in balance (greater or broader) than the demand side.Inflation occurs when the supply side/productive capacity of the economy is not producing enough output to keep up with the demand side.
    So increased govt spending can be expanded;especially when their is low capacity utilisation in the productive sector.As firms can then simply expand production (mainting market share) to keep up with extra demand.

  26. Bill,

    I always read your blog with interest and am surprised you are not looking at Melenchon’s proposals in more details. Now that he is front and center in the race to the French presidency, he looks to me to be the best defender of MMT theory (without explicitly referring to it of course).
    Lepen has always been and will always be borderline fascist under a varnish of respectability (cf Vel d’Hiv comments and the fact she can’t get rid of her very politically charged entourage).
    Would love to read your thoughts on his proposals.


    A Melenchon fan
    PS: reposting to get email alerts

  27. Dear MerluchPower (2017/04/19 at 12:11 pm)

    Stay tuned. I have been reading up on Jean-Luc Melenchon’s economics and will write about it soon.

    best wishes

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